Friday, January 12, 2007

At this week’s Consumer Electronics Show, FCC Chairman Kevin Martin took a hard line against postponing implementation of the set-top box integration ban scheduled to take effect this July. The integration ban is the regulatory mandate that prevents cable operators and other multichannel video service providers such as Verizon from selling or leasing devices that integrate both security and non-security functions. I have argued there are many reasons why the costs of implementing the ban outweigh the consumer benefits. You can read my views here and here and weigh them for yourself.

But there is one oft-repeated canard, perhaps even superficially appealing at first blush, offered by integration ban supporters that needs to be put to rest. The canard goes like this: The FCC required telephone companies to separate their transmission service from customer premises equipment (CPE) and the result was a burgeoning, competitive CPE market. What was good for Ma Bell with regard to mandating separation of service and equipment will be good for today’s multichannel video providers and consumers.

Unfortunately, Kevin Martin picked up this refrain at the CES. He even quoted Consumers Union, which rarely has encountered any regulatory mandate that it doesn’t think should be made even more stringent, to the effect that in the days before the CPE unbundling mandate, “consumers had to pay a lot of money for any ugly black rotary phone that only did one thing.”

It’s easy to beat up on ugly black rotary phones. Having grown up with one, and a party line to boot, I’m tempted to do so myself sometimes. But having grown up with a black phone and a party line, I’m (unfortunately) old enough to know there is a world of difference between the telecom environment in the 1960s and 1970s when the CPE integration ban was promulgated and today’s environment. In short, it is the difference between a mostly monopolistic analog era and a digital era characterized by increasingly robust competition. It almost certainly made sense in Ma Bell’s heyday to require the separation of transmission service and CPE because Ma Bell possessed monopoly power in both markets. It had the incentive and ability to stifle the development of an independent CPE market.

That was then and this is now. The multichannel video market is fast becoming robustly competitive, especially with new entrants such as Verizon and AT&T challenging the incumbent cable and satellite operators. And truth be told, the multichannel video market is just one segment of the larger digital broadband market, a market in which consumers are being offered, and apparently demanding, a bundle of voice, video, and Internet services, and often equipment, as part of a package. Here is what the FCC said in early 2002 in its Wireline Broadband proceeding: “As we have noted in the past, broadband is evolving across multiple electronic platforms as traditional wireless, cable, satellite and wireline providers have expended substantial investments in broadband capable infrastructures.”

It cannot be seriously maintained, although Consumers Union might still try to do so, that in the five years since 2002 that the broadband market, of which video is just a part, has not become even more competitive with the continuing build-out of multiple digital platforms. In other words, today’s market resembles the market Ma Bell faced at the time of the CPE integration ban about as much as I resemble George Clooney, Patrick Dempsey, or Sean Penn. In other words, (unfortunately again) not at all.

What does this mean for telecom policy? It means that in the current competitive environment, all MVPD providers have incentives not only to allow, but to encourage, the use of whatever equipment will maximize the value of their service platform in the eyes of consumers. Having invested billions of dollars in upgrading their networks to provide an array of digital services, the broadband service providers cannot afford to do otherwise. They simply will not be able to foist on consumers equipment that consumers do not want.

So, don’t tell me about ugly black rotary phones from the original Beach Boys era. That was then and this is now.

On many broadband issues, and especially most recently in trying to resist new net neutrality mandates, FCC Chairman Kevin Martin deserves much credit for forcefully and effectively articulating a vision of allowing broadband to flourish in an environment unburdened by costly and unnecessary regulations. With that record in mind, and armed with the discretion Congress granted the Commission to waive or sunset the equipment regulations, I would urge rethinking the set-top box integration ban in the context of today’s competitive broadband environment.